Recently I purchased shares in beaten-up telecom Vocus Group Ltd (ASX: VOC), making it approximately 3% of my portfolio. Should current prices persist, I'll likely buy more in the next couple of weeks.
Rather than dwell on how the company got to this stage (you can find a summary here and here), I'll focus on what I perceive to be the company's main issues and why I think it is an opportunity today:
The opportunity:
- Growing market share in both NBN and New Zealand's UFB (ultra-fast broadband) networks; a competitive area but Vocus is successfully growing its piece of the pie
- Other growth areas including Australia-Singapore Cable (ASC), energy, mobile, and increasing penetration of services in the corporate market (e.g. backup services via Vocus' data centres)
- Synergies yet to be fully achieved from acquired businesses
- A low price providing substantial margin for error
- Prospect of attractive future dividends once current issues are worked out
The risks:
- Debt burden a concern especially if earnings take another downgrade; Vocus has several levers to pull to lighten debt though, including cutting dividend and possible sale of data centres
- Possible more 'cockroaches in the kitchen' esp. with Nextgen acquisition reportedly underperforming already, and two recent downgrades
- Possibility for continued difficulty, increased expense, and delays integrating systems across its acquisitions
- Possible technological obsolescence; I am not a techie but over the past 20 years it has not paid to bet against changes in the way we connect and use data
- Possible rumoured private equity buyout; Vocus shareholders appear to have capitulated, but if private equity swooped in and bought the company at a premium to recent prices, it would be a win for them and not for shareholders
So What?
In my opinion, Vocus looks cheap with attractive long-term assets (its cables have an estimated ~20 year lifespan), and is growing its market share in a market that is itself growing at a reasonable pace. While competitive and financial concerns are real, I think that they have been overstated – teething pains, not smallpox.
